August 11, 2017

Coinbase Portfolio Strategy

Coinbase Portfolio StrategyMy Coinbase Portfolio Strategy invests into all of the Cryptocurrencies that Coinbase currently offers:  Bitcoin, Ethereum, and Litecoin. Coinbase plans to add more Cryptocurrencies in the future.  For various reasons, it would be worth investing in all three cryptos; but instead of guessing which one will be the most profitable, I use a calculated strategy to diversify across all three.  Many investment advisors use this strategy often in the stock market.  It’s known as a Market Cap Weighting Strategy. The basic idea is for you to try and match your own portfolio allocation percentage to the market capitalization of the underlying assets.  This is the same idea behind major stock indices like the S&P500, NASDAQ, and the DOW.  By diversifying across multiple assets you reduce your overall risk. Generally, the larger an asset’s market capital, the safer the investment.  So, the idea behind this strategy is to maximize gains while reducing risk by allocating more money to safer assets while still gaining a nice boost from riskier assets. This strategy also allows me to scale up if I add more Cryptocurrencies at a later time.

Market Cap Weighting – Coinbase Portfolio StrategyCoinCap Market Capital

So, let’s breakdown the idea behind the Coinbase Portfolio Strategy. The image from CoinCap on the right shows the market capitalizations of the top 13 Cryptocurrencies as of today (08/11/2017).   For now, we are only concerned with looking at Bitcoin, Ethereum, and Litecoin.

  1. The first step is to sum the market cap together
    • $55,409,355,641 + $28,203,356,529 + $2,519,197,572 = $86,131,909,742
  2. Then you take each individual market cap and divide it by the total.
    • Bitcoin – $55,409,355,641 / $86,131,909,742 = 0.643 or 64%
    • Ethereum – $28,203,356,529 / $86,131,909,742 = 0.327 or 33%
    • Litecoin – $2,519,197,572 / $86,131,909,742 = 0.029 or 3%
  3. Now, let’s say you have $1000 to invest, this is how you would allocate your money.
    • $1000 x 0.64 (64%) = $640 gets invested into Bitcoin
    • $1000 x 0.33 (33%) = $330 gets invested Ethereum
    • $1000 x 0.03 (3%) = $30 gets invested into Litecoin
  4. Re-calculate every time you invest, or Update your allocations on a schedule
    • After you make your first investment using this strategy, you can choose to continue getting the most current market capitalization and re-calculate before each investment, or re-calculate your portfolio allocations every few months or so.
    • I personally like to re-allocate my portfolio every three months.  This way I only have to re-adjust my investment 4 times a year.

Coinbase Portfolio Strategy – Crypto Assets

Bitcoin Ethereum And LitecoinBitcoin – The Gold Standard for Cryptocurrencies.  Bitcoin was the first Cryptocurrency created by the infamous Satoshi Nakamoto in 2009, right after the World Financial Crisis. Although many Alt-Coins or alternatives to Bitcoin have been created since then, nothing compares to Bitcoin’s massive global network and infrastructure.  From the miners that secure its network, to the users and merchants willing to accept it as a payment for goods, Bitcoin is the most widely known Cryptocurrency throughout the world and has built up an amazing reputation.  All eyes are on Bitcoin as the Digital Gold of the Cryptocurrency World.  Very often, people who invest in other Cryptos, will take their profits and invest them back into Bitcoin as a way to store the value that they gained from the higher risk alt-coins.  This helps to support Bitcoin’s dominance as the best Crypto for long-term value storage. But perhaps the best reason why Bitcoin is still number 1, is that it currently has the most real world use cases.  All around the world, we are seeing nations and corporations opening up to the idea of using Bitcoin as a method of transferring value and there are always new projects in development to increase Bitcoin’s usage on a Global Scale.  These are the reasons why Bitcoin is our number one holding in our Coinbase Portfolio Strategy.

Ethereum – In July of 2015, a very young man known as Vitalik Buterin lead the development and creation of a new type of Cryptocurrency, Ethereum.  Unlike Bitcoin, Ethereum was not initially designed to be used primarily as a method of value transfer, but it was built from the ground up to be a Smart Contract Blockchain Platform.  The native currency of the Ethereum Blockchain, known as Ether, was not intended to be used as money, but rather a type of fuel for the smart contracts running on its Blockchain.  A smart contract is basically computer code that is written to a specific address on the Ethereum Blockchain.  In order to activate the smart contract code, one must only send Ether to the address where the smart contract exists.  Smart Contracts are capable of doing anything the developers writing the code can imagine. Developers of Ethereum use a coding language known as Solidity, which is similar to JavaScript and specifically designed for the Ethereum Virtual Machine running on its Blockchain.  While some people consider Bitcoin the Digital Gold of Cryptocurrency, Ethereum is more suited for Enterprise use cases. This is why several huge corporations have formed the Ethereum Enterprise Alliance aimed at building real world applications using the Ethereum Blockchain.   Ethereum’s Network can be compared to the idea of a Global Computer System, running programs on its operating system 24 hours a day, 7 days a week, with zero downtime ever.

Coinbase Advertisement OneLitecoin – The last Crypto we use in our Coinbase Portfolio Strategy, is Litecoin.  Many people claim Litecoin is the Silver to Bitcoin’s Gold. One of the main reasons people use this analogy is because Litecoin is basically a copy of Bitcoin’s Blockchain code. Litecoin increased the total supply of coins and enhanced its own blockchain with several updates resulting in faster transactions and lower fees. Since Litecoin is essentially built using the same core code as Bitcoin, it’s used for testing innovative ideas and updates prior to releasing the same upgrades to the Bitcoin Blockchain.  The recent Bitcoin upgrade known as Segregated Witness was first implemented into Litecoin very successfully. All Bitcoin developers focused on how well SegWit worked on Litecoin’s Blockchain prior to making the same changes to Bitcoin.  So, in some ways, Litecoin can be seen as a Beta testing environment for future Bitcoin upgrades.  This has worked out very well in Litecoin’s favor as more and more people are beginning to understand the importance of Bitcoin’s little brother.  Therefore, Litecoin supports the growth of the entire Cryptocurrency Market.  Litecoin is a fantastic addition to our Coinbase Portfolio and continues to help boost our overall return on investment.

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